From 1 December 2009 additional regulations (The Registered Pension Schemes (Authorised Payments) Regulations 2009) came into force regarding the commutation of trivial benefits from occupational pension schemes. The main aim was to provide members and trustees with a means of settling extremely trivial benefits in a number of circumstances where it would be either cost prohibitive or extremely difficult (if not impossible) to provide pension benefits.
The regulations themselves are an excellent example of pension simplification, at least to the extent that the word simplification is automatically taken to mean the opposite when prefixed by the word pension!! Indiana Jones would be troubled to escape the plentiful pitfalls to secure the grail of an Authorised Trivially Commuted Small Benefit Payment.
Matters were further complicated when a keen sighted lawyer spotted that the regulations had been drafted incorrectly and did not allow for contracted out benefits; amended regulations are expected in April 2010.
There are five circumstances under which small benefits can now be trivially commuted. I have summarised these here though not comprehensively to avoid the need for a 50 page blog!! For those with trouble getting off to sleep the full regulations are available.
1. Small Trivial Commutations appear straight forward at first sight, provided the benefit value is less than £2000, but, the requirements are complex depending on the size of the scheme and whether benefits have been transferred in or out of the relevant scheme (or any scheme related to the same employment).
2. Small Commutation for Over 75s that have been untraceable for at least 5 years prior to the 75th birthday. Again the benefit value must not be more than £2000 and must be the extent of all benefits that the member was entitled to from all related schemes.
3. Payments after Liability Discharged is again limited to a £2000 benefit value and is useful when additional benefits come to light after a member has transferred or purchased an annuity. The requirements, however, are limiting; the benefit cannot be a contribution or transfer in and the Trustees could not have been expected to know about the extra entitlement. One suggested use is if Age Related Rebates are received after a member transfers.
4. Payment to Member Receiving an Annuity is probably the most complicated and requires that the member would be eligible to receive a normal trivial commutation were it not for the fact that they were already receiving an annuity from the scheme.
5. Commutation for Members Taking Protected Cash although relevant this was not provided for in the same regulations, it became possible from 1 June 2009 under The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2009. Pre simplification where a member’s Inland Revenue Maximum Tax Free Cash entitlement was greater than or equal to the value of their total benefits, they could take their whole benefit as a tax free cash lump sum (TFCLS). Post simplification TFCLSs no longer exist and we have Pension Commencement Lump Sums (PCLS), by definition a PCLS cannot be paid unless some pension is commencing therefore even if a member has a protected Pre A Day maximum cash sum which is greater than or equal to his benefit value he must retain at least £1 to provide pension benefits. Now he can take the £1 as cash subject to PAYE tax.
As we have always known legislators may have the best of intentions but generally make things more complicated when trying to do the opposite. Even if all requirements are understood and met, the pension scheme rules may not allow such commutations.
There is significant potential to improve many schemes administration and potentially save associated costs, particularly where a large number of members with very small benefits remain in the scheme, but great care needs to be exercised and professional advice sought.